Thursday, June 14, 2007

The Gap (GPS): Another Watch List Update

In early February I posted about The Gap (GPS) and as it has been almost 6 months, time for another update like I did yesterday for Caterpillar (CAT). It is important to look back at you decisions as it is a great learning experience.

You should first read the February Gap post here, then continue with this post as it will be referenced.

From January:

"Numbers: We need to break everything down to per share amounts. Why? You pay your price for the company on a per share basis, we need to find out what you are getting for that money by the same metric. Currently Gap has 900 million shares outstanding and roughly $2.5 billion in cash (this amount has typically risen after the holiday season but we will use "what is" rather than "what could be"). That gives us $2.77 per share in cash. It's property is valued at $7.2 billion or $8 a share (this is carried at an undervalued level, I will use it though so as not to be accused of fudging numbers to make a point, again, "what is"). Profits will be about 85 cents a share and the dividend is 32 cents a share. At this profit level, investors are paying 23 times 2007 earning (16 times the $1.25 they earned in 2006). The total value of the cash, property, earnings and dividends is $11.94. Sales look to be about $16 billion this year or about $17.80 a share."

Where are we now?

As of May 5th, Gap now has $2.7 billion in the bank, EPS looks to be on track to finish the year around the 85 cents a share and the dividend is the same. Shares outstanding have increase 2 million but that is a function of the timing of repurchases vs. employee options and the overall number should continue to decrease. Debt, is unchanged and still essentially irrelevant. Q1 2008 revenue(quarter just completed) rose over Q1 2007. In March they announced the long overdue closing of the Town & Forth chain and are expanding the best performing unit, Banana Republic, a great move. Growth of the over saturated Gap line is being reigned in and the popular Old Navy brand in on track which is better but not really good enough. More decisive action probably wait until a new CEO is installed.

So, what to do? The stock price is essentially unchanged since the original post and until our single determining factor is answered, we should remain on the sidelines.

From February:

"I am not buying shares of Gap now nor do I currently own any. I want to hear what the new CEO says first. If they just continue the same path and try to jazz it up through more advertising, I do not see a resurrection of the Gap brand. In that scenario I believe they are in for another five years of mediocrity. But, any hint of them closing unprofitable locations and I am jumping in as I think we'll have a ValuePlay."

What do I really want? Ideally Eddie Lampert at Sears Holdings (SHLD) buys them. He is raising $3-$5 billion for more investment and with the cash he now has at Sears (almost $4 billion) he could easily do the deal. Now that Julian Day is in the process of fixing RadioShack (RSH) after he laid the groundwork at Sears and Kmart, would he like a return to a bigger stage with his buddy Lampert at the Gap to cement his fame as a retail turnaround wiz? The thought of this makes me want to run out and buy Gap shares but, that would be foolish. Like I said above, if the new CEO is just more of the same, shareholders will just get more of the same which is not much.

I think Gap is in wonderful shape and has great potential, I just need to know the direction they are going in.

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